3Q21F results preview

  • Consumer staple companies likely hurt by tightened mobility restrictions in 3Q21F; we only expect SSG and DELFI to show profit growth on a yoy basis.
  • Consumer brands, including THBEV and DELFI, are our top sector picks; we like them as recovery plays beyond 3Q21F, as we believe the worst is over.
  • Sector valuation attractive at 1.3 s.d. below 5-year mean, but we recommend investors to be selective as outlooks diverge. Reiterate sector Neutral.

3QCY21F results likely to be weak

Due to the resurgence of Covid-19 cases regionally which, led to tightened mobility restrictions and impacted household income, we expect consumer staples companies to show profit declines on a yoy basis in 3QCY21F. Exceptions are SSG (net profit +11%
yoy on elevated demand for groceries) and DELFI (EBITDA +50% yoy on low base).

Consumer brands – better times ahead

We forecast THBEV to see topline shrink by 14% yoy in 3QCY21F, on the back of tightened mobility restrictions. DELFI, helped by stabilisation of the Covid-19 situation in Indonesia since Aug, could see topline grow 10% yoy in the quarter. Both companies are likely to enjoy some margin expansion on scaled back advertising and promotional activities. We also do not expect significant impact from recent raw material price increases in the quarter, as both companies have locked in purchases for raw materials
early. We expect sequential topline recovery for both in 4QCY21 as they benefit from easing mobility restrictions — THBEV should especially gain from the planned resumption of alcohol sales at restaurants and reopening of entertainment venues in
Thailand by Dec 1.

Retailers – mixed outlook

SSG is likely to continue benefiting from continued elevated demand for groceries in 2H21F as Singapore remains in a transition stage to a “new normal” of living with Covid-19. However, our concern remains on its slow store count growth YTD and intensifying competition from online grocery channels, which could cause its net profit to be pressured in FY22F, with elevated demand likely tapering off. Meanwhile, DFI is likely to see a continued tough operating environment in 2H21F, due to: 1) possibility of Mainland China–Hong Kong border reopening remaining elusive, 2) elevated grocery demand tapering off in Hong Kong, and 3) associate Yonghui (601933 CH, Hold, TP: Rmb4.30) suffering significantly from rapid growth of community group purchase model in China.

Livestock farming – Weak business environment across the board

We expect JAP’s core net profit to decline by 52.6% yoy on weaker margins arising from lower demand and higher cost pressures. Two of its key operating markets, Indonesia and Vietnam, were impacted by lower demand (household income impacted) and
distribution channels being shut due to movement restrictions. Margins were also pressured due to lower prices, and rising feed costs. Although recovery is underway, we believe the pace will be gradual given fluidity of the situation. As such, we downgrade
JAP from Add to Hold, with TP lowered to S$0.77 on uncertain recovery pace.

Reiterate sector Neutral; THBEV and DELFI are our top picks

Leading up to 3Q results, we think SSG and DELFI could see near-term strength in share price in view of potentially strong results, while DFI and JAP could see some pressure on potential downward revision of consensus’ earnings estimates. We reiterate Neutral on the sector, despite attractive valuations of 15.5x rolling forward P/E, or 1.3 s.d. below 5- year mean. We recommend investors to be selective as outlooks diverge. THBEV and DELFI, which are both laggard recovery plays, are our sector’s top picks. Upside risks include stronger sales recovery; downside risks include higher raw material prices pressuring margins.